The phony economics of Second Life

What the business press didn't tell you

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Analysis Two weeks ago, business leaders at Davos gave their blessing to Linden Lab's Second Life. They hailed the spectacular growth of its virtual economy while politicians spoke of democracy itself moving into its online world.

But little of this coverage questioned its true popularity, or how sustainable its "virtual economy" might be.

Second Life went live in 2003, burning through $8m of venture capital investment over the next three years. And it remained invisible until recently - with a few mentions on enthusiast weblogs. But in March 2006, Linden Lab used some of an $11m additional investment from VC firms, and from Amazon's Jeff Bezos, eBay's Pierre Omidyar, and the Open Source Foundation's Mitch Kapor, to hire a professional agency, Flashpoint PR.

It was now business journalists who began to spread the word.

The Wharton School, Business 2.0, the Harvard Business Review - all wrote approvingly of Second Life's virtual economy. Newsnight's business correspondent, Paul Mason, entered it and interviewed an "in world" entrepeneur. The Guardian's former business editor Victor Keegan declared it, "the beginning of a whole new world." But, the most enthusiastic business reporter following Second Life has been Business Week's Robert D Hof. He has reported that it could challenge Windows as a way to create business software.

The coverage was less than complete, however. For example, there was scant mention of Linden Lab's scaling issues. Second Life's servers - which are hosted exclusively by Linden Lab - can only support between 50 and 100 avatars in one place at one time. Newsnight's party crashed after only 30 "guests" arrived. Melbourne's The Age reported Ben Folds launching an album before an "in world" audience of 25.

Virtual maths

Second Life needs large numbers of both producers and consumers if it is to represent the "new, new economy". However, its own estimation of user numbers is questionable.

Last October, Linden Lab claimed it had a million residents. By December, it was reporting two million. Second Life's front page now proclaims 3.1 million residents.

A "resident" of Second Life, as defined by Linden Lab, is a login of its software. Remove the clients belonging to the same email address or payment details and the number of residents falls by over half a million. Remove the number of clients resolving to the same IP address, and it falls still further.

Only 15 per cent of those who became residents in October of last year ever logged in again after their first 30 days - a churn rate that might surprise and dismay executives from other industries. Remove all those who never returned to Second Life after their first month and the figure falls from a then two million residents to around a quarter of a million. Typically, there are only around 15,000 clients logged in to Second Life at any one time.

In other words, this economy has a population about the size of Ilkeston, Derbyshire, or Troutdale, Oregon. And each business has the prospect of a market of no more than 100 people in one place - a number easily accommodated by a church hall.